Tuesday, November 01, 2011

Corzine's Big Bets Bust Major Financial Firm; Regulators Want To Know Where Investor Money Went

One of the sacrosanct rules in finance (and law) is that you never commingle investor/client funds with your own. It's one of the few automatic ways that a lawyer can find themselves disbarred.

Yet, we're now learning that the financial firm headed up by none other than former New Jersey Jon Corzine is potentially in hot water over being incapable of accounting for hundreds of millions of dollars of investor funds after MF Global went belly up after Corzine bet big on foreign funds and lost.
Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.

The discovery that money could not be located might simply reflect sloppy internal controls at MF Global. It is still unclear where the money went. At first, as much as $950 million was believed to be missing, but as the firm sorted through its bankruptcy, that figure fell to less than $700 million by late Monday, the people briefed on the matter said. Additional funds are expected to trickle in over the coming days.

But the investigation, which is in its earliest stages, may uncover something more intentional and troubling.
Sloppy controls my ass. Banks and financial firms know down to the penny how much is in individual accounts and that MF Global was playing games and can't account for where all the investor money was is not just troubling, but it shows that regulators failed in basic oversight to make sure that the brokerage was playing by the rules.

How did MF Global get in this mess? Corzine bet company money on European debt - and didn't have sufficient capital to back up the bets. He did the same kind of thing at Goldman Sachs where some of those decisions went bust, but Goldman Sachs could absorb some of those losses. Here, he's dealing with a much smaller firm and by buying up big holdings of debt from Spain, Italy, Portugal, Belgium and Ireland at a discount, he thought he could turn around and profit if the Eurozone fixed its mess. However, it wasn't to be.

So, while the bonds may have matured in less than a year - we've repeatedly seen that failure to have proper capitalization can lay low major financial firms. MF Global was taking inordinate risk and lacked sufficient capital reserves; that's where the issue of investor money comes into play. Regulators are now poring over whether the company used those investor funds to paper over and increase the capital behind the bond bet.

The CME and other regulatory bodies are already saying that MF Global broke the rules. The question will be determining the extent of the mess.

And criminal charges should be coming down the road too. You break these kinds of rules, and you're essentially stealing from your clients in the hopes that you can make back your money. It's a losing proposition and the brokerage industry needs to know that these rules aren't to be trifled with.

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